Split-dollar funding arrangements have been used for many years. Oftentimes, the purpose of a split-dollar arrangement is to reduce the cost to an individual for insuring the individual's life. The cost to the individual is reduced by splitting the premiums paid for the life insurance with a sponsoring individual or entity, such as the individual's employer. An equity split-dollar arrangement is generally secured by a written agreement that provides for the sharing of premiums in exchange for the sharing of the death benefit and cash value that may be realized from the policy. As one of many advantages, split-dollar arrangements can be structured in many different ways to achieve the objectives of the parties to an insurance contract.
Recent legislation may impact the ability of parties to enter into split-dollar arrangements. In particular, the Sarbanes-Oxley Act of 2002 makes it unlawful for an issuer of securities, directly or indirectly, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan, to or for any director or executive officer (or equivalent thereof) of that issuer. Any loan in existence on Jul. 30, 2002, is exempted from the reach of this prohibition, so long as there is no material modification to any term of the loan or any renewal of such loan on or after that date.
Moreover, according to proposed regulations regarding the taxation of equity split-dollar life insurance arrangements, one type of split-dollar arrangement—collateral assignment, is essentially a below market loan from the sponsor to the insured, while another type of equity split-dollar arrangement—endorsement, is not. One key to the distinction is the ownership of the split-dollar policy. In a collateral assignment type arrangement, the insured owns the life insurance policy and assigns benefits to the sponsor in exchange for premiums paid by the sponsor. In contrast, the sponsor owns the life insurance policy in an endorsement split-dollar arrangement. The distinction is important due at least in part to the federal tax treatment of the respective types of arrangements.
Prior to the issuance of the proposed regulations, IRS regulations did not differentiate between endorsement and collateral assignment split-dollar arrangements. All economic benefits provided by the sponsor under split-dollar arrangements were taxed as compensation to the insured. The insured was taxed on the annual cost of the life insurance (less any premiums paid by the insured), and also on any distributions or other economic benefits provided to the insured by virtue of the split-dollar arrangement.
Under the proposed regulations, ownership of a life insurance policy is determined as follows. The owner of a life insurance policy is generally the entity named as the policy owner. If more than one entity is named as the policy owner, then the first entity listed is the owner, unless each entity has an undivided interest in the rights and benefits of the life insurance policy. If each entity owns an undivided interest, then each listed policy owner is deemed to own a separate life insurance policy (and neither policy is considered to be a split-dollar policy).
The proposed regulations require both the owner and the non-owner of the life insurance contract to provide comprehensive and consistent accounting under any type of split-dollar arrangement. More specifically, the parties to the life insurance policy must account for:                premiums paid by owner and by the non-owner of the life insurance policy (although premiums paid for a split-dollar life insurance policy are not tax deductible by either the insured or the sponsor);        the value of the economic benefit conferred on the insured by the sponsor's payment of premiums on the insured's behalf;        the value of any interest in the cash surrender value (CSV) of the policy that is provided to the non-owner during the taxable year;        distributions (other than death benefits) made from the policy to the owner and/or the non-owner;        payments or other consideration given to the sponsor by the insured in exchange for the sponsor's payment of premiums on the insured's behalf; and        reimbursements for premiums or taxes paid, which is treated as taxable income to the payee and as a deductible business expense by the payor.        
The new regulations have created a need for insurance companies and the parties to track the relative interests of the parties throughout the term of an equity split-dollar insurance policy. Comprehensive accounting is necessary for compliance with the regulations, and can aid in structuring split-dollar arrangements so as to minimize the tax consequences and maximize economic benefits to both owners or parties.
The new regulations also create the need for innovative insurance products that continue to provide the benefits of split-dollar funding, while minimizing the regulatory and tax consequences to the participating entities.